The Oil Paradox: U. S. Exports vs. Persian Gulf Imports

©  Phil Wendt ,   August, 2014

 

Ever since the Arab oil embargo in 1973 the US has professed a strong desire for energy independence.  After two Iraq wars essentially over Persian Gulf oil we still are importing oil from the Gulf.  This is occurring at a time when the US is significantly reducing its overall oil imports; however imports from the Gulf have remained at historic levels.  Now it appears that US oil companies and Congress are looking at lifting the decades old ban on exporting US oil.

“So the U.S. spends as much or more protecting our oil interests in the Persian Gulf than the oil is worth, up to several times more.”

Apparently the two Iraq wars were insufficient motivation to reduce our imports from the Persian Gulf.  But now that Congress is opening the door on the export ban this would be an opportune time to start making the call to reduce Gulf imports before we significantly increase exports from our own shores.  Energy independence should still be of paramount importance to the US, and linking increased exports to eliminating Persian Gulf imports may be just the paradigm to make that happen.  Reducing or eliminating our use of Persian Gulf oil will give the US one less reason to maintain such a significant presence there, saving lives and US tax dollars.  Eliminating our use of Persian Gulf oil should also be seen as a vital national security issue.

In this essay I will explore this issue further and put some broad numbers to imports vs. exports, the cost of protecting our oil interests in the Gulf, and also look at the overall paradox of increasing our exports and while still importing oil from the Persian Gulf and elsewhere (including countries to which we export).

The Original Ban and Exports

First some facts about the export ban I mentioned earlier.  There have been several, but the most salient law governing oil exports is the Energy Policy and Conservation Act of 1975, which banned the export of crude oil from the U.S. except under select circumstances. It’s the “…except under select circumstances” that has allowed exports to increase steadily since 2001 (Figure 1).  The ban was in response to the Arab oil embargo of 1973 and was designed to increase production in the US, thus furthering our long-standing goal of energy independence.

Figure 1. US Annual Crude Oil Exports

Figure 1. US Annual Crude Oil Exports

As you can see in this figure it took a few years for the ban to take effect, but exports did drop sharply after about 1979-80.  Oil companies and many in congress on both sides of the isle are now pushing for increasing oil exports as a means of increasing oil production in the US.  Others in congress however have pressed to slow the increase in order to avoid price volatility that the original ban was supposed to control.  Environmental groups are also concerned about any increase in fossil fuel production as it relates to global warming. These are all valid issues relating to increasing exports, however my concern here relates to the disconnection between increasing exports while imports from the Persian Gulf proceed unabated.

Imports

So let’s look at the import picture.  Figure 2 shows the imports of crude oil from various sectors around the world.  The very good news is that overall imports are declining. However, the one main U.S. import sector that seems to hold fairly steady is the Persian Gulf.  Many analysts believe the global nature of the world oil market makes oil pricing somewhat disconnected from its place of origin. “Anybody who follows the oil industry will tell you that it doesn’t make any difference where the oil comes from,” according to Keith Crane of the RAND Corporation (Flintoff, 2012).  Or does it?  Is the cost of a $100/barrel of crude from the Persian Gulf really the same as a $100/barrel of Canadian crude, or any other crude? Let’s take a look.

Figure 2. US Oil Imports

Figure 2. US Oil Imports

 

Costs vs. Value: How the US subsidizes Persian Gulf Oil

The unstable political landscape of the Persian Gulf has long since required a U.S. military presence there to protect our strategic national interest as it relates to oil.  Over the years several economists have calculated estimates of just how much that military presence costs the U.S. taxpayer to protect those oil-related interests.  A study by Delucchi and Murphy (2008) looked at the value of our imports from the Persian Gulf compared with the cost of our military presence there as a function of only protecting our oil interests.  This study excluded war-time and non-oil related military costs.  The estimated value of our Gulf imports for 2004 (the year on which the study focused) was roughly $33 billion.  The military cost of protecting those imports was estimated to range from $27 – $73 Billion.  A similar study in the prior year by Copulos (2003) estimated a 2003 oil value of $25 Billion compared against a military cost ranging from between $52 – $62 Billion.  Delucchi and Murphy (2008) also concluded that the cost of military protection in the Gulf was highly correlated with the value of those imports.  Therefore as the value of those rose, the military costs of protecting those Gulf oil interests also rose accordingly.

“Why do we continue to significantly subsidize, through our military engagement, oil imports from one of the most unstable and costly parts of the world, and reduce imports from everywhere else?”

So the U.S. spends as much or more protecting our oil interests in the Persian Gulf than the oil is worth, up to several times more.  Now that $100 barrel of Persian Gulf crude really costs us up to $300/barrel, so where the oil comes from really does matter.  In essence the U.S., by its military presence in the Gulf, is not only subsidizing Gulf oil for US companies who purchase it, but for any company or country that purchases it.

It’s true that even if we no longer import oil from the Gulf the US will still have a strategic interest in the Middle East, namely a nuclear Iran and our alliance with Israel, among others.  But without the Gulf oil interest future conflicts in the Middle East are far less likely to result in a “Boots on the ground” type of response.  We will likely always need some military presence in the Gulf, but eliminating or at least reducing our oil interests in the Gulf region will also make it easier for the US to more fully pivot towards Asia in terms of our foreign policy and pursuing our broader economic interests.  Also it will reduce leverage by Arab nations in any future negotiations with the US on a wide range of issues. It seems that recently every time the US is about to fully turn its attention to Asia, something in the Middle East pulls us into a new conflict there and away from pursuing our mutual interests with Asia.

U. S. Production is on the Rise

Oil production in the U. S. has steadily climbed since 2009 increasing from 5.2 million barrels/day to 7.2MB/D in 2013, a steady 38% increase (Congressional Research Service, 2014). The CRS projects that US oil production will continue to increase to 9 MB/D by 2025, which translates to over 3 Billion barrels/yr..  Additionally, the CRS projects US natural gas production to steadily increase through 2040.  Now I’m not suggesting that all these increases in home-grown oil and gas can just be switched across the board and replace our Gulf imports, but unless someone begins to focus on reducing our Gulf imports it certainly will never happen.  In addition, because Gulf oil value directly affects the cost of protecting those reserves, any significant reduction in Persian Gulf oil will also result in lowered military costs.  We need to look closely at US production and how it can help wean us off Gulf oil. This needs to be part of any discussion of lifting the US ban on oil exports.

The Paradoxes

So with such dramatic decreases in US oil imports from around the world, why have Persian Gulf imports remained virtually unchanged?  Why do we continue to significantly subsidize, through our military engagement, oil imports from one of the most unstable and costly parts of the world, and reduce imports from everywhere else?  If in 2005 Persian Gulf imports into the US were prohibited, there would have been more than enough oil elsewhere, including from our own increased production, to meet our oil needs in the US.

Let’s look at the issue of the cost of protecting our oil interests in the Gulf in a more practical way. The capacity of the US Strategic Petroleum Reserve, established after the 1973-74 OPEC oil embargo, is 727 million barrels.  It is the largest stockpile of government –owned emergency crude oil in the world.   At a current cost of $97.65/barrel, the value of the SPR is roughly $70 Billion, a value that falls well within the cost of what the US taxpayers currently pay every year merely to protect our strategic oil interests in the Gulf. I merely point this comparison out to show that we have choices and that there are far better ways to spend our tax dollars.

Finally, why do we still talk about the oil market as if it were a truly ‘free’ market when we provide such a significant subsidy, at great cost and risk to American lives, to keep this market operating?

As a postscript to the above discussion I have to also include another somewhat related paradox: Canada is the largest buyer of US exported oil. So why are we pushing the Keystone XL pipeline for Canada to export its low-grade tar sands crude into the US while we are shipping higher grade oil back to Canada?

Conclusions

I believe that what’s really missing here is a long-term energy policy. Such a policy should also include a plan to significantly reduce our reliance on fossil fuels. This probably isn’t going to happen any time soon.  However, I believe that there is a unique opportunity now for a more thorough discussion of how to extricate ourselves from at least one major US operation in the Middle East…oil.  There needs to be a direct linkage made between further increasing US oil exports and a mandatory reduction of Persian Gulf imports.  We need to stop treating the oil market as a free market; actually it is a “free” market for everyone else who buys Gulf oil because we heavily subsidize it, but not for the US.

As policy matters go, I see this as a twofer; we have a chance to take a step forward on a significant Middle East national security issue while at the same time bringing us a step closer to a broader and more long-term energy policy.  It appears to me that the US energy market can move forward without the need of Persian Gulf oil which in itself could also further simplify our Middle East national security profile.

Other Oil-Related Questions

I’ve raised many questions here, and perhaps over time I’ll find the energy to delve into them more deeply. One significant question that bears further analysis is the relationship between the House of Saud (Saudi Arabia is the largest Persian Gulf Exporter to the US) and the US.  But first I felt it was important to at least raise the issue of connecting further U. S. exports to Persian Gulf Imports.  There may be a window of opportunity to have an honest dialogue on this issue as Congress weighs the pros and cons of removing the oil export embargo.  Eliminating Persian Gulf oil imports should be seen as a matter of national security, and a central part of an overall national energy policy.

Literature Cited

Congressional Research Service. 2014. U.S. Crude Oil and Natural Gas Production in Federal and Non-Federal Areas.(http://energycommerce.house.gov/sites/republicans.energycommerce.house.gov/files/20140410CRS-US-crude-oil-natural-gas-production-federal-non-federal-areas.pdf)

Copulos, M. R. 2003. America’s Achilles Heel, the hidden costs of imported oil. The National Defense Council Foundation, Washington D.C., October.

Delucchi, Mark A. and Murphy, James J. 2008. US Military expenditures to protect the use of Persian Gulf oil for motor vehicles. Energy Policy. Vol 36 pp 2253-2264

Figure 1 – Export Data from Energy Information Administration: http://www.eia.gov/dnav/pet/pet_move_exp_dc_nus-z00_mbbl_a.htm

Figure 2 – Import Sources Data from Energy Information Administration: http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbbl_a.htm

Flintoff, Corey 2012. Where does America get oil? You may be surprised. NPR, April 12, 2012. (http://www.npr.org/2012/04/11/150444802/where-does-america-get-oil-you-may-be-surprised)

© Phil Wendt, August 2014

2 Responses to The Oil Paradox: U. S. Exports vs. Persian Gulf Imports

  1. Chris Wendt says:

    Oh crap…first I have to calm down, then I have to make some time to re-read this more carefully, and to at least scan the source material. Then I will have to think this all through and cobble together a fitting reply, and finally, figure out what a better, more effective response should be to this paradox. This all pisses me off, I mean except the part about cobbling together a response. (THIS is intended solely as a preliminary response!)

    Seriously, great piece, Phil!

  2. Chris Wendt says:

    This is a follow-up to my previous comment, Phil. Your essay is excellent and worthy of having something constructive done with or as a result of your findings and conclusions. But anything constructive, or disruptive, flowing from here should not be left merely as a function of luck in the timing of the publication of this work.

    There is a golden window of opportunity approaching in the fall Congressional elections. I see that window as being open from mid-September to the end of October, about six or seven weeks. For my part, I would like to see this study serve as the basis for a forward-looking “tipping point”, or at least, in part, as a case study for the deliberate attempt to intentionally create tipping point around your conclusions.

    How?

    “How” immediately becomes “Who?” Which candidates, especially incumbents seeking re-election, have benefitted from this swindle over the years? Who, by name, state and district, are vulnerable to your conclusions be used to turn them out of office? That last answer then generates a list of names of aspiring challengers in several race who could get behind your conclusions and an effort to correct this situation.

    I guess I am suggesting and pointing to some additionally required legwork, some more targeted research to identify a number of specific 2014 Congressional candidates as to whether they are potentially vulnerable to your findings, or potentially beneficiaries of your findings. Presuming you could timely make such a list, then we would need to make plans to take your findings public in an effectively disruptive manner with the intention of impacting the November elections, or at least some of them.

    Even with no or little success from such an endeavor by this November, by having drawn a line in the sand, now, you could set the stage to escalate this situation in time to more effectively impact the 2016 General Election which will sport two (hopefully) new Presidential candidates plus the normal Congressional turnover.

    Thoughts? Interested?

    Chris

I'd love to know what you think, please leave a reply